An outstanding performance: Q4 earnings season shattering expectations

On the latest edition of Market Week in Review, Director and Senior Investment Strategist Paul Eitelman and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed highlights from U.S. Federal Reserve (the Fed) Chairman Jerome Powell’s recent speech. They also provided an update on fourth-quarter earnings season and chatted about key takeaways from U.S. President Joe Biden’s recent phone conversation with Chinese President Xi Jinping. 

Inflation disappoints as Powell stresses continuation of accommodative policy

Remarks delivered by Fed Chairman Jerome Powell in a 10 February speech to the Economic Club of New York were not particularly surprising, but the tone of his speech was important for a key reason, Eitelman said. “Powell’s speech was about as dovish as it could have been,” he explained, “with the Fed chair stressing that despite substantial progress in the nation’s economic recovery, the central bank is still a long way from achieving its dual mandate of maximum employment and price stability.” As evidence, Powell pointed to the fact that millions of Americans still remain unemployed as the nation struggles through the COVID-19 crisis, Eitelman said.

“Powell’s comments seem to emphasize that the Fed wants to stay as accommodative as possible for as long as possible,” he noted, adding that the central’s bank switch last August to an average inflation targeting framework means that strong economic growth alone won’t be enough to justify raising interest rates. The potential for any rate hikes will hinge more on the status of U.S. inflation, Eitelman explained, with the central bank already stressing that inflation may be allowed to overshoot its 2% target for some periods of time.

Recently released core inflation data shows that inflation continues to run weaker-than-expected, he said, with the latest numbers from the Labour Department showing a 1.4% increase in consumer prices on a year-over-year basis. The reading, which Eitelman characterised as a negative surprise, reinforces the view that the Fed will refrain from raising rates for a considerable amount of time, he stated. The combination of an accommodative central bank and anticipated strong economic growth is likely to spell a good environment for U.S. risky assets this year, Eitelman added.

Q4 earnings results smashing expectations

Turning to fourth-quarter earnings season, Eitelman said that the overall performance to-date has been outstanding on a global basis. In the U.S., with roughly 70% of companies reporting results, around 85% have beaten expectations, he noted.

“That’s an impressive number on a stand-alone basis, but what’s even more impressive is the magnitude at which companies are surpassing expectations,” Eitelman stated. He explained that several weeks ago, the consensus among analysts for fourth-quarter U.S. earnings growth was a decline of -9%. Instead, earnings growth is currently tracking around +3%, Eitelman noted. “This is, quite frankly, one of the biggest upgrades to an earnings season that I’ve seen in a very long time,” he stated.

Outside of the U.S., results have also been impressive, Eitelman said. 70% of European companies are beating earnings expectations by a wide margin, while Japanese businesses are also reporting similar results. “All in all, these kinds of numbers are very encouraging,” he remarked.

Call between Biden, Xi shows China-U.S. tensions remain

Switching to China, Eitelman noted that U.S. President Joe Biden and Chinese President Xi Jinping recently held their first phone conversation since Biden assumed office. Accounts of the call between the two world leaders paint a fairly uncomfortable conversation, he said, with reports that Biden expressed significant concern over China’s economic practices and behaviour.

“There are still a number of simmering issues between the U.S. and China that, on a secular basis, look pretty challenging—and this call is evidence of that,” Eitelman said. While there’s a baseline expectation in markets that China-U.S. tensions are more likely than not to ratchet down under the Biden administration, the phone conversation demonstrates that there are still tensions remaining, he noted.

“Ultimately, while an escalation in tensions between the two countries is by no means part of our baseline scenario at Russell Investments, I do believe the situation is worth keeping a close eye on,” Eitelman concluded.

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